Banks hike FD rates as cash levels plunge

A number of large and mid-sized banks raised term deposit rates in December, luring customers to park surplus money with them as the system liquidity deficit widened following tax outflows and tepid government spending.

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Some banks raised rates for deposits up to 2 crore; others raised rates for bigger deposits. Top lenders State Bank of India (SBI) and Bank of Baroda (BoB) increased rates on fixed deposits by 25-50 basis points (bps) and 10-125 bps, respectively, for different tenors on 27 and 29 December.

A basis point is one-hundredth of a percentage point.

A banking system liquidity crunch has sparked the rate hikes. Liquidity has remained in deficit since mid-September, with some days of surplus in between. According to Bloomberg data, the deficit widened to ₹2.6 trillion on 21 December, the highest in 2023.

The liquidity situation is expected to improve as government spending picks up. Kotak Institutional Equities said in a note on 26 December that the government has adequate room to spend in the January-March quarter; it expects the government to run down on its cash balance in the coming months.

From May 2022 to November 2023, the weighted average deposit rate increased by 213 bps on fresh deposits, as per Reserve Bank of India (RBI) data.

Bankers said their asset-liability management committees are figuring out which buckets need more funds.